Fintech disruption threatens wholesale payment revenues

By Anna Fedorova

Wholesale payments and cash management (PCM) is a rapidly growing area, but existing players are under threat from technological disruption and must innovate in order to survive, according to a report by management consulting firm Oliver Wyman.

In ‘Wholesale payments report: Disrupt from within’, the consultancy argues that banks must look closely at the strategies adopted by challengers and make changes to their legacy systems in order to defend their turf. 

“We see up to $175 billion (70% of revenue pool) in revenues at risk for incumbents,” writes Ronan O’Kelly, partner at Oliver Wyman and co-author of the report. 

“Advances in technology are reducing the cost of market entry and switching, at the same time regulations are requiring banks to make client data available to competitors. With $250 billion of revenue at stake, wholesale payments and cash management is a battleground that banks need to defend.”

In the first half of 2018, revenues for PCM jumped 10%, and the firm forecasts annual growth of 5% over the next five years, propelled by growing volumes and rising interest rates that look more than able to offset margin compression. 

Rising competition

There has already been a huge rise in investment into payments technology. According to a KPMG report, ‘The pulse of fintech’, overall investment into fintech across venture capital, private equity and mergers and acquisitions deals in the first half of 2018 already exceeded the total investment in the whole of 2017.  

“Globally, we are starting to see more mid-tier banks – in addition to insurance and wealth management companies – have recognized the need to embrace fintech and are making investments either directly or through participation in accelerators, incubators or innovation consortia,” writes Anton Ruddenklau, global co-leader of fintech at KPMG International and co-author of the report.

This includes fintech specialists such as TransferWise and Revolt, software providers like Xero and Sage, and large technology and platform businesses such as Apple and Alibaba. 

Marty Chavez, CFO at Goldman Sachs, told Oliver Wyman: “[Transaction banking] – that’s an opportunity right there. The adjacencies to our core franchise are striking and obvious… And then also the adjacency to our foreign exchange business is obvious.”

Meanwhile, blockchain technology is increasingly being used to improve the efficiency of post-trade infrastructure in electronic FX trading, as well as to reduce back-office costs. This could eventually lead to the complete elimination of human involvement in post-trade workflow.

Rise to the challenge

To compete in this new environment, banks and treasurers face a double challenge of trying to squeeze more value from existing operations, while also building new capabilities to rival the market disruptors.

Marc Delbaere, head of corporates and trade at Swift, outlines three key elements that can ensure the

success of new projects in wholesale PCM.

“Firstly, those banks that understand and address the pain points of corporates will fare well – and those that are able to incorporate the feedback of users will inevitably fare best of all,” he says. “Secondly, banks that are able to implement their offerings on a global scale – and get to critical mass fast – will be at a major advantage.

“Thirdly, success favours those that are able to start small and deliver value fast – scaling up their offering as they go along.”

This is the approach Swift took with developing its global payments innovation (gpi) for corporates (g4C) – a new multi-bank payments tracking solution for corporates. This initiative was driven by corporate requirements and implemented in a standard way by the largest banks, with further enhancements expected down the line.

Legacy systems

A key area where existing players need to make improvements is switching from legacy systems, which have long suffered from underinvestment and can be extremely costly to maintain. 

According to Oliver Wyman, simple maintenance of “flawed old systems” can cost the largest players some $200 million to $300 million a year – up to 15% of revenues. Meanwhile, clients who have chosen to build new digital banks from scratch have been able to do so for less than $200 million in under a year.

O’Kelly writes: “Of course, wholesale payments is a different business. But the size of the prize is sufficiently large, and the cost of a targeted bet sufficiently small, that many challengers and more innovative incumbents are looking for ways to apply these techniques in the wholesale payments business.

“Lessons from big tech tell us that where there are unmet needs, or high margins, new and nimble challengers will find a way to provide compelling solutions. Challengers are presented with a large market, ripe for disruption. Incumbents must rise to the challenge and find ways to deliver a generational change in wholesale payments.”